Aug 22, 2018

The world isn't ready for the next financial crisis

Illustration: Sarah Grillo/Axios

Ten years ago, hubristic Wall Street geniuses came this close to destroying the global economy, saved largely by the Fed feeding trillions of dollars into banks in the U.S. and around the world.

Why it matters: This time, unlike in 2008 and 2009, it may be that no one comes to the rescue, given new U.S.-China tensions, frayed trans-Atlantic relations, and Trump Administration hostility to multi-lateral actions.

The 2008 financial crisis is not really over: Even as the U.S. stock market bull run made history today, the crash continues to reverberate in the form of still-recovering economies and massive global distrust in institutions.

  • The memory and residue of the crash are primary reasons why economists and policymakers are on the lookout for the next big financial crisis.
  • If a new crisis is brewing, it's in emerging markets, says Adam Tooze, a Columbia university professor and author of Crashed, a history of the 2008 financial crisis. Emerging economy stock markets are already down about 10% this year in aggregate.

The background: The financial crisis was triggered by U.S. mortgage defaults, which exposed the folly of trillions of dollars in exotic financial instruments packaged, sold and resold to investors and banks around the world. But even banks with no mortgage exposure ended up in trouble when global interbank lending dried up.

  • What makes the story chilling and gives it continued relevance is the degree to which global banking was and continues to be hugely intermeshed — and how it relies to even a greater degree on the U.S. and the dollar.

I caught up with Tooze by phone on his U.K. book tour. The new problem is China, which just by 2015 had borrowed $1.7 trillion in foreign currency, mostly in dollars, to finance its investments.

Tooze called China "the hub of a complex of emerging market economies," with connected manufacturing and other supply lines, commodity and product sales, and countless other businesses relying on the yuan.

  • A big danger is movements in the yuan, he said. "One of the nightmares is that China would allow its currency to move dramatically and bring down all of the emerging markets," he said.
  • Emerging market economies, he said, do not have the same cash reserves as China to tide them through a devaluation crisis, he said.
  • Already, the yuan has devalued by about 10% against the dollar this year. "We are probably testing the limits and the world is watching anxiously," he said.

Go deeper

Coronavirus dashboard

Illustration: Sarah Grillo/Axios

  1. Global: Total confirmed cases as of 3 a.m. ET: 665,164 — Total deaths: 30,852 — Total recoveries: 140,225.
  2. U.S.: Leads the world in cases. Total confirmed cases as of 3 a.m. ET: 124,665 — Total deaths: 2,191 — Total recoveries: 1,095.
  3. Federal government latest: President Trump announces new travel advisories for New York, New Jersey and Connecticut, but rules out quarantine enforcement. Per the CDC, residents of those states must now "refrain from non-essential domestic travel for 14 days," with the exception of critical infrastructure industry workers.
  4. State updates: Alaska is latest state to issue a stay-at-home order — New York is trying to nearly triple its hospital capacity in less than a month and has moved its presidential primary to June 23. Some Midwestern swing voters who backed Trump's handling of the virus less than two weeks ago are balking at his call for the U.S. to be "opened up" by Easter.
  5. World updates: In Spain, over 1,400 people were confirmed dead between Thursday to Saturday.
  6. 🚀 Space updates: OneWeb filed for bankruptcy amid the novel coronavirus pandemic.
  7. Hollywood: Tom Hanks and Rita Wilson have returned to U.S. after being treated for coronavirus.
  8. What should I do? Answers about the virus from Axios expertsWhat to know about social distancingQ&A: Minimizing your coronavirus risk
  9. Other resources: CDC on how to avoid the virus, what to do if you get it.

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Coronavirus updates: Global death toll tops 30,000

Data: The Center for Systems Science and Engineering at Johns Hopkins, the CDC, and China's Health Ministry. Note: China numbers are for the mainland only and U.S. numbers include repatriated citizens and confirmed plus presumptive cases from the CDC

The novel coronavirus has now killed more than 30,000 people around the world — with Italy reporting over 10,000 deaths, per Johns Hopkins data.

The big picture: The number of deaths from COVID-19 in the U.S. surpassed 2,000 on Saturday. The United States leads the world in confirmed coronavirus infections — more than 124,000 by early Sunday. The number of those recovered from the virus in the U.S. passed the 1,000-mark on Saturday evening.

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Photo: Olivier Douliery/AFP via Getty Images

Gilead Sciences CEO Daniel O’Day said in an open letter Saturday the company is expanding access to its experimental anti-coronavirus drug remdesivir to include severely ill COVID-19 patients.

The big pig picture: President Trump has called the antiviral drug "promising," but the results of six clinical trials on this investigational medicine are still being conducted, so its effectiveness the treatment of the novel coronavirus has yet to be proved. The World Health Organization is involved in the tests.